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Detroit bankruptcy vote hinges on creditors' homework

As creditors prepare to vote on a plan to end Detroit’s $18 billion bankruptcy, the city still needs help from state lawmakers to pay its obligations while avoiding a fire sale of its fine art collection.

Financially stricken Detroit must secure funding from a Republican-controlled legislature to shore up its pensions. Emergency Manager Kevyn Orr continues to try to lease Detroit’s water system to generate cash to improve services that now leave residents waiting hours for buses and police on streets darkened by broken lights.

State lawmakers have yet to approve Gov. Rick Snyder’s plan to give $350 million over 20 years -- or $195 million in a lump sum -- to Detroit’s employee pension systems. The money is necessary to secure an additional $466 million from private foundations and the Detroit Institute of Arts to defray pension cuts while shielding the museum’s art collection from sale to pay creditors.

“The key word is ‘if,’ and there are a lot of ifs,” said Douglas Bernstein, a bankruptcy lawyer at Bloomfield Hills-based Plunkett Cooney PC, who represents one of the foundations that pledged money for the pension systems.

The balloting is a crucial phase of the largest U.S. municipal bankruptcy, which was filed in July and raised alarms over the sanctity of municipal bonds and state-protected pensions. Court mediation has produced numerous agreements from retirees, employee unions and some bondholders, though some holdouts cast uncertainty over the 1,110-page plan of adjustment Orr presented to U.S. Bankruptcy Judge Steven Rhodes.

Private donations

Without the state money, the private donations will disappear and pension cuts would be much deeper. And with majority Republicans suspicious of a large gift for Michigan's largest city, dominated by Democrats, the legislature may not vote until early June, leaders said last week. That means at least some creditors will vote on a plan that’s not fully baked.

The vote by tens of thousands of Detroit’s bondholders, pensioners and employees will guide Rhodes’s decision to accept or reject Orr’s plan sometime this summer. The city will start sending out ballots with documents explaining the plan on May 12, and voting will last until July 11.

The 20-page ballots and instructions will be daunting to many because they’re like a math “homework assignment,” Bernstein said. They are in plain English as Rhodes demanded, yet laden with details that could overwhelm some, he said.

“For the lay person, it’s still intimidating,” Bernstein said.

Final pieces

Though it lacks final pieces, the plan gives voters enough information to decide whether it’s in their best interest, Bernstein said. If the state approves the money for the pension systems, or a water department deal is struck, those can be considered by Rhodes later.

If the legislature doesn’t approve the money pledged by Snyder, all “yes” votes from current and former city workers would be counted as “no’s,” Carole Neville, a bankruptcy attorney representing retirees, said in an interview. The state aid has been resisted by Republicans and some minority Democrats who view Detroit with suspicion, said Republican state representative John Walsh, who supports the Detroit aid.

“We have to look at the totality of this plan. It affects the entire state,” Walsh said in an interview. “This is not a Republican or Democratic issue.”

Reaching agreements

Orr has reached agreements with some Detroit bondholders, organizations representing retirees, employees and the city’s two pension funds that cover 30,000 people. If the plan is approved, retired police officers and firefighters would continue to receive regular pension checks, though cost of living increases would be slashed. General employees would have monthly benefits reduced by 4.5 percent and lose cost of living allowances.

Retirees and other groups representing current and former workers have agreed that they will drop their efforts to have the city’s bankruptcy dismissed by a federal appeals court once money from the state and the private foundations is locked in, Neville said. Should current and former workers vote against the plan, the groups would continue with those appeals, she said.

To lock in the $816 million, a majority of current and former workers voting in each employee group must approve the city’s plan, and that majority must hold two-thirds of the claims of those voting.

74 percent

Some bondholders will receive 74 percent of $388 million they’re owed, under a mediated agreement. Other unsecured creditors, who have not yet settled, would get far less. Creditors who hold debt known as limited tax general obligation bonds and pension bondholders would get 13 cents on the dollar or less, according to the city’s plan of adjustment.

The plan is opposed by bond insurers, including Financial Guaranty Insurance Co. and Syncora Guarantee Inc.t pay retirees more at their expense, under the bankruptcy code.

At a May 15 hearing, FGIC will ask Rhodes to force the city to cooperate with four potential bidders for the city’s art. The insurer says more money could be raised by selling some of the art, or using it as collateral for a loan, than is being offered by the state and the private foundations.

Complex plan

Don Taylor, president of the Retired Detroit Police and Fire Fighters Association, said the plan is complex and will prod many phone calls among his 7,000 members eligible to vote, especially older retirees. He said members will receive hundreds of pages explaining Orr’s plan of adjustment.

“People just want to get it over with, so they can get on with their lives,” Taylor said. “There’s a lot of uncertainty.”

Orr still hasn’t reached an agreement with firefighters and the largest police officers union on new contracts.

In the background are court mediation talks over Orr’s plan to convert Detroit's water and sewer system to a public, regional authority among three surrounding counties that account for most of its sales. Direct talks produced a stalemate as county officials rejected Orr’s proposal to lease the water system to the new authority for $47 million a year.

The utility serves 127 communities over 1,079 square miles (2,795 square kilometers) and generated $744 million in revenue last year. The water department accounts for $5.8 billion of Detroit’s $18 billion of debt.

Water system

Orr’s plan assumes the water system would contribute $428.5 over nine years to the general retiree pension system. That would make up the pension shortfall owed to Detroit’s water department employees.

Orr said he was exploring possible sale or lease to a private operator for a water system that serves 40 percent of Michigan’s 9.9 million residents.

The plan for a public authority got a boost last week from 20 suburban communities that asked to join the mediation talks. The communities account for 20 percent of the water sales from Detroit, said Jeffrey McKeen, general manager of the Southeastern Oakland County Water Authority, which includes 11 of the municipalities.

McKeen said a private operator would be more expensive and suspect.

“It’s not good to have something as important as water and sewer service in private hands,” McKeen said in a phone interview. “We think that’s a public function.”